Insurance Law

Question 1

What is the Marine Insurance Act,1906?

Answer 1

An Act to codify the law relating to Marine Insurance

As a codifying act, its objective was to state the law on marine insurance as it stood in 1906, in the light of the developments that had taken place in the previous 200 years or so.

Question 2

The Marine Insurance Act (MIA) has been amended by which Act?

Answer 2

The Insurance Act 2015 (the 2015 Act) which received Royal Assent on 12 February 2015.

Question 3

The Insurance Act 2015 came into effect when?

Answer 3

August 2016.

Question 4

Why was the MIA amended by the Insurance Act 2015?

Answer 4

The English law of marine insurance has been further developed by case law since the act came into force.

Question 5

Was the MIA repealed?

Repealed: If a government repeal a law, it causes that law to no longer have legal effect.

Answer 5

No, most of its provisions remain unaffected and in force. But certain key provisions have been amended by the 2015 Act. (The Insurance Act).

Question 6

What was the purpose of the Insurance Act 2015?

Answer 6

Introduced substantial changes to the laws governing disclosure in non-consumer insurance contracts, including contracts with marine insurers.

The 2015 Act set out new rules in relation to warranties and other contractual terms and when insurers are allowed to reject a claim.

Question 7

What is marine insurance?

Answer 7

Section 1 of the MIA defines a contract of marine insurance as:

a contract whereby the insurer undertakes to indemnify the assured, in manner to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.

Section 3 MIA defines ‘marine insurance’ to include:
Any ship, goods, or other moveable (‘insurance property’) that are exposed to maritime perils and any liability to a third party that may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils.

Question 8

What is the concept of Assignment?

Answer 8

An insured transfers their interest in a policy to a third party, generally in exchange for some commercial benefit.

Question 9

Give an example of an assignment in respect of a shipowner and a bank (borrows money).

Answer 9

When a shipowner borrows money from a bank to purchase a ship by means of a ship mortgage the bank will require that the policies of insurance on the ship are assigned to it.

Why?
- To protect the bank’s interest in the ship which is the security for the loan it has advanced.

• if the ship were to sink, the bank would be able to recoup the outstanding balance of the mortgage from the proceeds of the hull insurance policy.

Question 10

How to perfect the assignment?

Answer 10

The assignee must give notice of the assignment to the insurer.

In the example before, the assignee is the bank, giving notice of the assignment to the insurer.

Reminder: assignment is when an insured transfers their interest in a policy to a third party, generally in exchange for some commercial benefit.

Question 11

Under the MIA, is a marine policy freely assignable?

Answer 11

Yes, unless it contains terms specifically forbidding such assignment.

Cargo policies are generally freely assignable to enable them to ass from sellers to buyers down the transaction chain.

Question 12

Both hull and P&I policies contain clear wording forbidding assignment of the polices without the express consent of the insurer.

Answer 12

The rules of One Group Club read as follows:

No insurance given by the Association and no interest under these rules or under any contract between the Association and any member may be assigned without the agreement of the Managers in writing. Any purported assignment made without such agreement shall be void and of no effect unless the Managers in their discretion otherwise determine.

Question 13

What is the Cub’s standard ‘Loss Payable Clause’?

<This is in the P&I rule book>

Answer 13

permits the Club to handle the insurance with the Member and to pay all claims direct to the Member without reference to the bank, unless and until the bank gives the Club written notice that the Member is in default under the mortgage agreement.

If that happens then all payments made by the Club thereafter will be re-directed to the Club.

Question 14

THe MIA provides that, unless the policy provides otherwise, the insurer is liable for any loss…

Answer 14

Proximately caused by a peril insured against and they are not liable for any loss which is not proximately caused by a peril insured against.

Question 15

What does the insurer is liable for any loss proximately caused by a peril insured against mean and they are not liable for any loss which not proximately caused by a peril insured against mean?

Answer 15

When a claim is caused by a number of different factors the court will have to determine which one of them was the proximate cause.

This is particularly important if some of the causes are insured perils, whereas others are not.

Question 16

Does the proximate cause have to be last cause in a chain of causes?

Answer 16

Not necessarily, rather it is the dominant cause - an issue that has to be determined on the basis of common sense.

Question 17

The MIA 1906 lists 3 types of loss for which an insurer will not be liable. What are they?

Answer 17

1. Any loss attributable to the wilful conduct of the assured. The insurer is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the Master or crew.

Question 18

What is the 2nd type of loss for which an insurer will not be liable?

Answer 18

2. Unless the policy states otherwise, any loss proximately caused by delay, even though the delay be caused by an insured peril.

Question 19

And the 3rd type of loss which an insurer will not be liable?

Answer 19

3. Unless the policy states otherwise, ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or any loss proximately caused by rats or vermin.

Question 20

Why is the exclusion of inherent vice which is primarily a matter of cargo insurance have an importance in relation to P&I claims?

Answer 20

• where the cargo interest has difficulties in recovering their loss from cargo insurers because the claim is, in their view, one of inherent vice, they will pursue their claim against the shipowner more vigorously.

Question 21

MEASURE OF INDEMNITY:

• the amount which an insured is entitled to recover under the policy.

What is the fundamental point?

Answer 21

The insured is not entitled to recover more than the loss the insured has sustained.

Question 22

SUE AND LABOUR:

What is the definition?

Answer 22

• derives from the Lloyd’s SG policy form.
• referred to as mitigation - steps taken by the insured AFTER the casualty to minimise any loss arising from it.
• The act specifically provides that it is the duty of the insured and their agents.

Question 23

In the P&I context, a typical sue and labour clause will have the word ‘solely’.
Why is this important?

Answer 23

Expenses use be incurred only for the purpose of limiting a claim on the Club and incidental expenses incurred for other reasons cannot therefore fall as sue and labour.

Question 24

<Clubs approach to the 2015 Act - ‘contracting out’>

What was the main driver for the changes contained in the 2015 Act?

Answer 24

The protection of consumers rather than commercial contracting parties.

Question 25

The 2015 Act, recognising the difference in the knowledge of and the need for protection of commercial as opposed to consumer contracting parties, contains a number of ‘contracting out’ provisions.

Answer 25

With the exception of ‘basis of contract’ clauses, commercial parties can contract out of the new provisions discussed earlier and the Law Commission, during the drafting process, envisaged that there would be widespread contracting out in sophisticated markets, identifying marine insurance in particular.

Question 26

Consideration was given by the Group to the impact of the new provisions, and to whether or not Clubs should contract out of any or some of these provisions. The following recommendations we’re made to, and adopted by, Club boards.

Answer 26

1. Non-disclosure/fair presentation of the risk
   - a fir presentation, and a professional assessment of the risk are what both owners and Club would aspire to.

Question 27

Provisions of the 2015 Act - contracting out

Warranties

Answer 27

The warranty or condition that the member will comply with any requirement of class, the practice adopted in relation to the provisions of the MIA was that cover is suspended during the period of breach.

The member will not be entitled to any recovery from the Club in respect of any claim arising during that period except at the discretion of the directors of the Club.

Question 28

Clubs approach to the 2015 ACT - ‘CONTRACTING OUT’

3. FRAUDULENT CLAIMS

Answer 28

Where an insurance contract confers benefits on third persons who are not parties to the insurance contract, the submission of a fraudulent claim by that third person will not affect the rights of the parties to the contract (S13 of the Act).

Question 29

The ENTERPRISE ACT 2016

Answer 29

• Entered into force on 4 May 2017
• includes one amendment to the new 2015 Act by implying into all contracts of insurance a term requiring the reimbursement of claims within a reasonable time.

Question 30

The ENTERPRISE ACT 2016

What is it about?

Answer 30

• introduces certain remedies for breach of that implied term requiring reimbursement of claims within a reasonable time.
• remedies including the possibility for the insured to claim interest.

Question 31

What did the Club decide regarding the ENTERPRISE ACT 2016?-

Answer 31

Bearing in mind the mutual nature of the risks insured, and the manner in which claims are handled by Clubs and under the IG pooling arrangements, these provisions did not appear to be appropriate in relation to the cover provided by Club.
- 8 affected Group Clubs elected to contract out of this provision and the maintain the long-standing exclusion of the payment of interest on Members’ claims.

Question 32

The ENTERPRISE ACT 2016

Under what circumstances will insurers not be permitted to contract out of the implied term of requiring the reimbursement of claims within a reasonable time?

Answer 32

• where the insurer deliberately or recklessly fails to reimburse an insured’s claim within a reasonable time.
  Club Members will therefore be protected to that extent.

Question 33

RIGHTS OF INSURERS ON PAYMENT

Answer 33

Once an insurer has made a payment to an insured, it is then entitled to take over the rights of the insured and is SUBROGATED TO ALL THE RIGHTS AND REMEDIES OF THE INSURED in respect of the subject matter of the claim as from the time of the event causing the loss.

Question 34

What does ‘SUBROGATE’ mean?

Answer 34

• to take the place of another person in respect of their legal rights.
• entitles the insurer to pursue recovery against any third party who might be responsible for causing the loss that the insurer has paid.

Question 35

Subrogation - in the P&I context

Answer 35

This occurs frequently because cargo underwriters, having paid a claim to the cargo interests for loss or damage to the cargo that occurred during the sea carriage, claim indemnity from the P&I Club’s Member for breach of the contract of carriage.

Question 36

Under what circumstances can P&I insurers exercise rights of subrogation?

Answer 36

• when they believe that some third party is responsible for the claim which they have reimbursed to the Member.
  E.g. where the Member is liable under the B/L for cargo damage but the damage was in fact caused by the Member’s subcontractor such as a stevedore or a terminal operator.

The Club rules provide that, if a recovery is made, the Club is entitled to keep it up to the amount reimbursed to the Member with interest.

If the claim was subject to a deductible borne by the Member then the interest will be divided between Club and Member pro-rate to the amount paid by each.

Question 37

INSURABLE INTEREST

• What is the basic principle of insurance law regarding insurable interest?

Answer 37

• generally the law will only recognise and enforce the terms of a policy if the insured has an insurable interest in the subject matter of the policy.

Question 38

What does the MIA provide in respect of insurable interest?

Answer 38

• every person has an insurable interest who is ‘interested in a marine adventure’.
• where the person ‘stands in such a relationship to the adventure or to any insurable property at risk in it that they might benefit from its safe arrival or be prejudiced by its loss, damage or detention, or may incur a liability in respect of it’.

Question 39

Is ownership a prerequisite to having an insurable interest?

Answer 39

NO.

E.g. a time-charterer of a vessel has an insurable interest in relation to the their liability to the shipowner for loss or damage to the ship arising from their breach of the charter contract.

E.g. a shipowner who does not own the cargo they transport has an insurable interest in any liability they incur under the contract of carriage should it arrive damaged.

Question 40

The assured has to have an insurable interest in the subject matter of the policy at the time of the loss but…

Answer 40

They need not have an interest at the time the policy is put in place.

This is particularly important in the case of cargo insurance where the beneficiary of the policy is each successive purchaser.

Question 41

What is ‘gaming or wagering’?

Answer 41

If the assured does not have an insurable interest and has no expectation of acquiring one, then the policy is deemed to be a policy by way of ‘gaming or wagering’.

Such a contract is void.

Question 42

Disclosure and misrepresentation - the 1906 ACT

Set out a principle that is peculiar to contracts of insurance and other contracts of a fiduciary nature, namely that such contracts are contracts of the ‘utmost good faith’ or ‘Uberrimae fidei’.

What does this mean?

Answer 42

• has the effect that if the utmost good faith was not observed by one party to the contract, then the contract could be avoided or set aside by the other party.

Question 43

The utmost good faith character of insurance contracts had a profound effect on the duty of the insured in negotiating the contract with the insurer.

What is required from the insurer or the broker on the insured’s behalf?

Answer 43

• to disclose every material - relevant - circumstance that was known to the insured.
• the insured was also deemed to know every circumstance that the insured ought to know in the ordinary course of business.

Question 44

What is deemed ‘material’?

Answer 44

If it would influence the judgement of a prudent insurer in fixing the premium or determining whether they will take the risk.

The test was both subjective and objective in that the information must have been of sufficient significance to have influenced the judgment of both a hypothetical objective and prudent underwriter, and the actual underwriter who wrote the risk.

I.e.: if the actual underwriter would not have been influenced by a given circumstance, had it been disclosed, the assured was not in breach of their duty of disclosure even if, from the point of view of a hypothetical objective and prudent underwriter, the circumstance would have been material.

Question 45

The 1906 Act provided some guidance as to what circumstance might NOT be material in the absence of enquiry by the underwriter. These are as follows:

Answer 45

1. Any circumstance which dismisses the risk;
2. Any circumstance which was known, or presumed to be known by the insurer. The insurer was presumed to know matters of common notoriety or knowledge and matters which an insurer ought to know in the ordinary course of their business.
3. Any circumstance as to which information was waived by the insurer.
4. Any circumstance which it was unnecessary to disclose because it was covered by a warranty in the policy itself.

Question 46

Name another obligation of the insured under the 1906 ACT

(In addition to full material disclosure)

Answer 46

• ensure that any material representation (statement) that they made in the negotiations for the insurance was true.
• a representation may be either as to a matter of fact or as to a matter of expectation or belief.
  I.e.: the difference between what was represented and what was actually correct would not be considered material by a prudent insurer.
  where the representation was as to a matter of expectation or belief it was treated as true if was made in good faith.
• a representation could be withdrawn or corrected before the contract was concluded and where this was the case, the original representation became irrelevant.

Question 47

What is the consequence if an insured fails to make proper disclosure or makes a material misrepresentation in negotiating for the insurance?

Answer 47

• the insurer has the right to avoid the policy - treat it as if it had never existed.
• the insurer would be requested to return to the insured any premium paid under the policy and the insured would be required to repay to the insurer any claims paid under the policy.

Question 48

The insurer may have had the right to avoid the policy, they were not bound to do so. What could the insurer do if they wished?

Answer 48

Waive their right to avoid the policy and confirm it.

If they did so, they still retained the right - in the case of misrepresentation but not in the case of non-disclosure - to claim damages.

Question 49

The insurer could, if they wished, waive their right to avoid the policy - still retained the right to claim damages in the case of misrepresentation.

This right arises under which Act?

Answer 49

The Misrepresentation Act 1967

this introduced into English law the right of the innocent party to claim damages - either in addition to or in substitution for the right to avoid policy - where the misrepresentation in question was made in good faith.

• The law had always recognised the right of the innocent party to claim damages where the misrepresentation had been fraudulent.`

Question 50

DISCLOSURE AND MISREPRESENTATION - the 2015 ACT

The 2015 ACT makes significant changes to the regimes established under the MIA.

What changes were made?

Answer 50

• The interpretation by the courts of the ‘utmost good faith’ disclosure obligation under the MIA resulted in many complexities and inconsistencies.
• This obligation is replaced under the 2015 Act by a duty to make a ‘fair representation’ of the risk.

Question 51

Under the 2015 Act duty to make a fair representation of the risk - what does it emphasise?

Answer 51

• greater emphasis is given to the insurers’ roles in the process of disclosure, which a Member potentially fulfilling its duty of fair representation by disclosing sufficient information to put the CLub on notice that it needs to make further enquiries.

Question 52

The remedies for breach of the duty to make a ‘fair representation’ of the risk will be different, depending on whether they are deliberate or reckless breaches, when avoidance is allowed, or innocent breaches, where a series of different remedies are available.

Answer 52

These include:

Where the insurer can prove that but for the breach they would not have entered into the contract at all, avoidance; where cover would have been provided but on different terms, the inclusion of those different terms; where a higher premium would have been paid, a proportionate reduction with right of cover.

Question 53

WARRANITES - the MIA

In the law of marine insurance, the word ‘warranty’ has a particular meaning.

It is defined as a:

Answer 53

Promissory warranty, that is to say, a warranty b which the assured undertakes that some particular thing shall or shall not be done, or that some condition will be fulfilled, or whereby the affirms or negatives the existence of a particular state of facts.

Question 54

Give an example of a warranty

Answer 54

An owner may warrant to their P&I Club that their vessel is engaged only in the carriage of crude oil.

If, without the permission of their Club, the owner then engages the ship for the carriage of other cargo, their P&I cover comes automatically to an end, without any intervention by the Club itself.

Question 55

The MIA provides that…

Answer 55

A warranty is a condition that must be complied with exactly, whether or not it is material to the risk.

Question 56

If the warranty is not complied with, what is the consequence?

Answer 56

The insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.

This is the case even where the breach has been remedied and the warranty complied with before the loss occurs.

Question 57

There are some circumstances in which a breach of warranty may be excused. What are the circumstances?

Answer 57

Non-compliance is excused when,
- because of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract or
- when compliance with the warranty is rendered unlawful by any subsequent law.

Question 58

What can an insurer do as a result of a breach of warranty?

Answer 58

• can decide to waive it once the insurer knows about it.

Member/Club relationships can be put at risk where an unintentional breach of warranty has deprived the Member of their cover.

The situation could be righted if the Club agreed to waive the breach. In order to avoid embarrassment of this nature, underwriters in the commercial market and in the Clubs often qualify a warranty with the words ‘or held covered on terms to be agreed’.

Question 59

What does ‘or held covered on terms to be agreed’ mean?

Answer 59

The effect of these words is that,
Should a breach of warranty occur, the insured does not automatically lose their cover; they have the right to require its continuance on terms to be agreed with the insurer.

If no agreement can be reached the court will require the insurer to continue cover on the terms that a ‘prudent underwriter’ would have agreed.

Question 60

Warranties may be express or implied.

The MIA contains several provisions covering whether or not, and to what extent, a warranty is to be implied.

From a P&I point of view, which is considered the most important warranty?

Answer 60

• in a time-policy - a policy covering a period of time, e.g. a Club policy running from 20 Feb in one year to 20 Feb in the next - there is NO implied warranty that the ship shall be seaworthy at any stage of the adventure.

But the section goes on to provide that:

Where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

PRIVITY : knowledge / information about a private matter.

Question 61

The position under a VOYAGE POLICY is different.

The MIA requires…?

Answer 61

At the commencement of the voyage, the vessel shall be seaworthy for the purpose of the particular adventure insured.

‘Seaworthy’ = ‘reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured’.

Question 62

WARRANTIES - the 2015 ACT

The strict position under the MIA has been diminished under the 2015 Act, particularly in relation to the consequences of a breach of warranty.

What does the 2015 Act in respect of warranties?

Answer 62

1. The ‘basis of contract’ clauses which convert all statements made by an insured when applying for insurance into warranties, are ineffective
2. Breaches of warranty will suspend rather than discharge, an insurer’s liability.
   There will be no liability for losses which arise whilst an insured is in breach, but once that breach is remedied cover would be reinstated.
3. Warranties or other terms, except those which affect the risk as a whole, will not discharge the insurer from liability where the insured can prove that the relevant breach would not have increased the risk of the loss which actually occurred.

Question 63

FRAUDULENT CLAIMS

The MIA made no express provision in relation to fraudulent claims.

How were these dealt with?

Answer 63

Under common law principles, resulting in a lack of clarity with regard to an insurer’s right to refuse payment of genuine claims arising subsequent to the commission of a fraudulent act but before this was discovered or the policy terminated.

Question 64

What does the 2015 Act say about fraudulent claims?

Answer 64

Providing expressly that an insurer will not be liable for a fraudulent claim
Can recover any sums already paid in respect of such a claim and, by notice, can terminate the contract with effect from the date of the fraudulent act.

SECTION 12 of the ACT

Question 65

DOUBLE INSURANCE

What is double insurance?

Answer 65

• where for some reason the insured has two or more policies that cover the same subject matter against the same risks.

In personal insurance this happens quite frequently because the general public is not always aware of the extent of certain coverages it already has and buys more without realising the overlap.

Question 66

In the world of commercial insurance, double insurance occurs more rarely, as sophisticated insurance buyers are less likely to spend more premium than they have to.

What does the act say about double insurance?

Answer 66

• the insured may claim against the insurers in such order as the insured chooses, but the insured will not be entitled to recover more than the loss they have sustained.
• In claiming against one insurer the insured must give credit for any recovery made from the other insurer.

As between the insurers each is bound to contribute rateably to the loss in proportion to the amount for which they are liable under their contract.

Question 67

What happens if one insurer pays more than their proportion of the loss ?

Answer 67

The insurer has the right to bring an action for contribution against the other insurers.

Question 68

Where there is double insurance in respect of liabilities, what will happen?

Answer 68

The loss will be equally apportioned between the 2 insurers subject to any special terms in one or other of the policies.

This is also the case where both policies contain ‘double insurance’ clauses under which there is no cover for risks that are insured elsewhere.

Rather than give literal effect to such clauses, which would leave the insured without cover for a risk that they had insured twice, the court will apply the equitable principle of contribution, and require each insurer to contribute to the loss, usually on an equal basis.

Question 69

DEVIATION

The concept of deviation in the MIA is of particular important to P&I insurers.

What does it say?

Answer 69

• the insurer is discharged from liability from the time of a deviation when a ship, without lawful excuse, deviates from the voyage contemplated by the policy, regardless whether the ship may have regained its route before any loss occurs.

Question 70

In the P&I context, what does deviation mean?

Answer 70

A shipowner unreasonably deviating from the contracted voyage may be deprived of the defences and limitations of liability that they would otherwise have had under their contract of carriage.

Without these defences and limitations the shipowner and their Club would be exposed to a claim without contractual defences and limitations.

This has led the Clubs to exclude from their standard cover liabilities arising from an unreasonable deviation.

In practice, the shipowner will usually arrange in advance special insurance against the deviation risk with the help of their Club.